Bermuda

In any word association game, its fair to say that ‘Bermuda’ would roll off of the tongue pretty quickly once the word ‘captive’ is mentioned. The island is well known for its captive population, with an advantageous tax rate and quality service providers, such as law firms, tax consultants and investment advisors. Throw in its exceedingly good climate, and all in all, it is fair to say that Bermuda is a strong captive destination.

In any word association game, its fair to say that ‘Bermuda’ would roll off of the tongue pretty quickly once the word ‘captive’ is mentioned. The island is well known for its captive population, with an advantageous tax rate and quality service providers, such as law firms, tax consultants and investment advisors. Throw in its exceedingly good climate, and all in all, it is fair to say that Bermuda is a strong captive destination.

The majority of Bermuda’s captives are single parent companies insuring only the risk of their parent or affiliates, and there are also single- and multi-owner captives writing limited amounts of third-party business. Casualty coverage accounts for a majority of all business written, which is followed by property coverage.

The island enjoys the unique position of being able to service all areas of the insurance spectrum: insurance, reinsurance and captives. The captive market in particular remains “vibrant and robust,” says Shelby Weldon, director of licensing and authorisation for the Bermuda Monetary Authority (BMA).

“Bermuda is the leading captive domicile globally: there were a total of 862 captives registered in Bermuda at the end of 2011. Latest available figures show that Bermuda’s captives also lead in terms of volume of business written—a total of $21.4 billion in gross premiums and total assets of over $86 billion.”

Despite its success, Bermuda is not sitting still. The Insurance Development Council (IDC) and the BMA are strengthening the island’s appeal to captive owners through Tax Information Exchange Agreements (TIEAs), and regulation concerning special purpose insurers (SPIs).

“The regulatory environment for captives is pragmatic as well as effective,” says Weldon. “Proportionate regulations are applied, that recognise the lower risk profile of such companies.”

Playing the field

As the concept of a captive becomes more widespread, the island is receiving queries from Central and South America, as well as the Far East. Many of these clients are venturing into new territory with captives, meaning that the decades of experience held by Bermudan staff is more than welcomed.

“The island’s professional support services are high-quality and well-established,” says Weldon.

“A full range of services are supplied by leading insurance brokers and captive management companies; there are also high-calibre and experienced legal, banking, accounting, actuarial and general financial and management services to support the market, which have helped Bermuda develop its substantial international business industry.”

Meanwhile, there is also growth in captive incorporations from mid-size companies in the US. The drawbridge was lowered between Canada and Bermuda with the signing and ratification of the TIEA between the two, and subsequently the island has welcomed re-domiciliations.

“Our registration numbers still show increases in captive registrations overall (862 in 2011 versus 845 in 2010), with the vast majority coming from the US, followed by Europe,” says Weldon. “The US has traditionally formed the bulk of Bermuda’s captive business, given the proximity of both markets as well as most captives globally being established by US corporations.”

However, with the influx of states such as Florida signing up to provide captive insurance, as well as stalwarts such as Vermont continuing to provide high quality services, competition remains tight.

“There is without doubt an increasingly competitive market for captive business, and the Bermuda market continually considers how it can leverage its attributes and experience accordingly to appeal to all potential marketplaces, including the US, Europe and additional markets such as Asia,” comments Weldon.

“The Bermuda industry has initiated outreach to such markets on a continuous basis to demonstrate how companies can benefit from the insurance solutions Bermuda has to offer, and the authority supports such efforts by explaining the regulatory environment. From a regulatory standpoint, the authority remains focused on ensuring that Bermuda’s captive regime remains practical and proportionate, recognising the limited purpose and much lower risk profile of captives.”

“There is also still value in Bermuda’s unique ability to provide captives with direct access to commercial reinsurance efficiently and effectively.”

Weldon stresses that the island continues to be attractive as a jurisdiction due to two important factors. Regulatory leadership is vital, with a framework that is risk-based and focused on remaining appropriate for the nature of the market here, while striving to be recognised and respected internationally. Also key is an experienced and responsive professional services infrastructure, which fosters business innovation, depth of intellectual capital and expertise, speed to market, and integrity.

Solvency II

A few eyebrows were raised when Bermuda announced that it was pursuing Solvency II equivalence, considering that domiciles such as Guernsey opted against it. With Jeremy Cox, the CEO of the BMA, announcing that there were a few “mischief makers” in the form of competitor jurisdictions hinting that Bermuda’s decision to seek equivalency would affect its captive sector, there was little doubt as to whom he was mentioning.

Yet, the island is moving ahead with its plan. Weldon says: “As the authority pursues Solvency II equivalence in relation to its commercial framework, Bermuda’s captive sector will continue to benefit from appropriate and pragmatic regulation.”

“Following high-level talks with officials in Brussels in June, the authority remains confident that Bermuda will be successful in its bid to win equivalence with Europe’s Solvency II Directive. The authority is also optimistic that European Commission undertakings exempting captive insurance companies in Bermuda from the Solvency II provisions will be honoured.”

“The meetings, which were arranged in collaboration with the Bermuda Government and the Association of Bermuda Insurers and Reinsurers, provided a further indication that the strong relationships which have been developed over recent years with the Commission, the regulatory body, EIOPA, and with members of the European Parliament, have helped pave the way for the current dialogue to take place.”

A March report from departing Bermuda Insurance Management Association president Thomas McMahon, who is also president of Cedar Management, stated that Bermuda took a bold leadership position in seeking Solvency II equivalence, affording other captive domiciles the luxury of sitting on the fence to wait for the outcome.

McMahon said: “There is no doubt we are in a changing environment, where change is inevitable. The best way to embrace change is to be in a position to define what that change should be. To do that, one has to be engaged.”

Weldon agrees: “The authority’s focus for gaining equivalency has been on Bermuda’s commercial market. This is due to the significant business Bermuda’s commercial insurers conduct with Europe, and the tangible benefits that can result to them from equivalency, such as less duplicative regulation.”

“Indications that the European Commission has the ability to grant bifurcated or ‘segmented’ equivalencey correctly recognises the distinction between Bermuda’s diverse market sectors—commercial and captives—and their vastly different risk profiles. This means that captives in Bermuda can continue to benefit from a practical regulatory framework and supportive market environment—with a level of supervision that remains appropriate for their lower risk profile—even as the authority pursues Solvency II equivalence.”

Notwithstanding the European Parliament’s voting on the final Solvency II text being delayed, EIOPA continues to indicate that Solvency II will come into force in January 2014.

However, Weldon indicates that Bermuda’s framework enhancements remain on track for completion by January 2013, and that the authority is continuing its work with the market towards full implementation.

“Also, it’s important to put Bermuda’s position regarding Solvency II into a wider context,” he says. Weldon asserts that the BMA has, for some time, been on a path to enhance its risk-based regime for Bermuda’s insurance market.

“We have endeavoured to make regulatory enhancements consistent with international standards and best practices for insurance supervision, ie, IAIS standards and, most recently, Solvency II. Therefore, changes the authority is making today stem from a long-standing strategic decision we took some time ago.”

“Our goal overall as we keep moving forward is effective execution and, importantly, doing what is right for Bermuda,” he asserts.

While regulatory equivalency will hush any naysayers that the island is not up to scratch when it comes to regulatory matters, Weldon emphasises a proportionate approach that ensures the island’s continued attractiveness.

“We see the goal as being to achieve desired regulatory outcomes that are common to the authority and our fellow supervisors internationally—commonality rather than duplication.”

“The authority’s use of a risk-based, proportionate approach to regulation while achieving those outcomes is part of this aim. Our approach recognises the diversity of markets and the differing risk profiles of firms operating within them, so that Bermuda’s captive and commercial insurance companies remain appropriately supervised. In this way regulation in Bermuda will remain workable for the firms and characteristics of our market.”